A Look Ahead at What May Be to Come in the Disaster Restoration Industry This Year
The beginning of a calendar year is the traditional time for releasing thoughts for the upcoming year. As I write this in December 2022, I find it challenging for next year due to some big issues that appear to be unresolved and otherwise unclear. The nature of predicting the future will always be complicated. It is my assessment that many of the drivers for the upcoming year will be propelled by macro environmental issues. These issues will impact every business regardless of industry. In this article I will not only address the key challenges that will be relevant to your business, but I will also discuss the steps you can take to address these issues and place your business in a position to thrive.
As of time that I am writing this article, we are not officially in a recession. I believe that by the time you read this article, it will be official – and many of my predictions below reflect this.
Business and personal debt levels are at record highs, higher interest rates, inflation in both wages and materials, continued supply chain restrictions, and high fuel prices are contributing to a deteriorating economy. The Fed is in a tight spot realizing that they have to balance cooling the economy with inflation at 40-year highs, while dealing with unprecedented debt. Higher interest rates will lead to a recession which will create a domino effect in the overall macro economy. The uncertainty is how long and high the rate increase become and then how deep the recession becomes. The connection between interest rates and debt at all levels has created never-seen realities. I just read today that globally, debt has increased $80 trillion over the past 10 years. There is no precedence for this level of debt in an increasing rate environment. Perhaps the global printing presses will continue to kick the can down the street and pain will be delayed until a later date. My suggestion is that you prepare for challenging times, sooner rather than later.
Trend #1: Increasing Interest Rates
It appears interest rates will continue to increase through at least the first quarter and perhaps longer, though the increases will be slower than in the past six months. The current higher rates will impact small and large businesses in the first part of the year. Ironically, you may even see rates cut again by the end of next year due to political pressures.
Recommendations for rising interest:
- Limit your overall debt both operating or capital. Don’t allow your business or personal situation to get into a debt trap which limits growth and creates risk.
- Create a plan to improve and speed your invoicing and collections. It surprises me how long it takes some companies to get an invoice out the door prior to even attempting to collect. Work to get invoices out the door within 24-48 hours after completion and then track days on receivable; this should be less than 50 days moving to less than 40 days.
- Manage your assets to extend their useful life.
- Define and follow progress payments on all larger jobs and collect from a position of strength.
Trend #2: Continued Inflation
I expect inflation to become very volatile throughout the year. The nature of employment, debt, and regulation will lead to booms and busts in prices. This will likely lead to disinvestment in some areas of the economy, which will impact supply chains. Does this sound confusing? In a market economy, the cure to high prices is high prices and visa-versa. In a managed economy, it leads to uncertainty with a bit of chaos mixed in.
Recommendations for inflation:
- Put an expiry date on your estimates and update pricing where available on jobs that last longer than 30 days – especially in the face of rising costs.
- Create and manage a budget on all your projects to maximize your gross margins.
- Update your pricelists frequently and understand how to influence the pricing database. Consider using time and materials (T&M) pricing where available to properly capture rising costs.
- Investigate materials pricing and utilize your purchasing power. Take all discounts.
- Utilize estimating resources to maximize your accuracy such as Ask Aime, Actionable Insights, etc.
- Use technology to limit trips as possible using 3D imaging and effective job management and other fleet management resources to reduce your fleet fuel expenses.
- As the economy slows, the competitive environment for restoration projects will change. Expect to see more jobs be undertaken by general contractors and trade specialists. Make efforts to improve your sales skills and improve your quality of leads through effective marketing.
- A recession might impact the availability and cost of construction materials. Florida reconstruction after Hurricane Ian will create pressure on the supplies of common building materials, so be diligent in planning your projects and managing your needed construction supplies.
- Clearly understand your pricing. Some programs and software platforms pay substantially lower than others. Know your numbers and make wise decisions on your program participation. Be objective and deliberate. Your focus needs to be on gross and net profit rather than top line revenue. If you don’t know your numbers, then you may get a lot of revenue – and grow your business into insolvency.
Trend #3: Changes to the Insurance Market
Inflation, interest rates, stock prices, as well as recessions have a complicated impact on insurance. Rising costs due to inflation will require higher premiums which may be complicated in a recessionary environment. Some of the likely impacts will include:
- Higher deductibles and more self-insurance.
- Lower quality of policies with more restrictions or exclusions.
- Continued presence of consultants on larger projects.
- Renewed desire for cash outs and quick settlements.
- There is a potential in some markets to encounter properties that are underwater with equity.
Recommendations for changes to insurance market:
- Manage collections and effective job management.
- Be diligent with your progress payments and draws on projects.
- Be deliberate in your marketing strategy. Assure dollars are spent wisely and you have a targeted growth strategy.
- Make sure you have agreement on price and scope prior to starting construction projects.
- Be disciplined in your job documentation and communication strategy with all parties to your jobs.
- Make sure you are providing pricing feedback and keep your price lists updated. Utilize custom price lists when available.
Trend #4: Labor
This is the first year that labor availability will not be a major limitation to growth. The only difference this year is that this should not be as previously. There are several competing issues that will impact this trend. Residential and commercial construction will slow due to the rapid increase in interest rates. This impacts new construction and remodeling. Cracks are showing in the overall labor market which will increase the supply of managers and even frontline positions.
On the other side of the equation, the supply will be constrained for skilled positions especially for construction staff. There are at least two drivers in this area. The first comes from the reality that for every five construction workers that retire, they are replaced by only two new workers. The other factor is the massive amount of government spending on COVID-related bailouts and infrastructure spending. Trillions of dollars have been budgeted, but largely not yet spent. This will require many workers for municipal and other commercial projects.
Recommendations for changes to labor market:
- Locating quality subcontractors needs to be a job function for your team. Establish a system for locating, screening, and onboarding subcontractors and then assure this process is acted on weekly.
- For in-house construction staff, you may need to increase the compensation, which also requires you to effectively manage budgets and use productive time wisely. One of my mentors in the industry talks about putting production on a pedestal to ensure you are maximizing their productive time.
- Focus on company culture as well as mission, vision, and goals. If you have the potential to find great people, then assure you have an environment that attracts and keeps the best.
- The survey completed by KnowHow last year on Why Workers Quit demonstrated that one of the biggest drivers of turnover and general worker discontentment is caused by a lack of training and poor onboarding and orientation programs. Pay attention to this process and create a systemized approach to procedures, especially onboarding and orientation.
- Create a clear career path within your business and define future opportunities for all levels in your business.
Trend #5: Technology
Currently, there are more than 60 software solutions in the restoration toolbox with more continuing to being added to the mix every year. This process will continue for the foreseeable future. The complicated and disparate nature of each solution will prevent consolidation soon. In the longer term, there will be consolidation and options for more synergistic solutions as these systems become more widely accepted and common ownership will drive consolidation. Software will move closer to the work being completed rather than an office function or post activity review. Examples of this would include Encircle automatically recording dimensions and tracking psychometrics, or the Actionable Insights’ Actionable Profile to manage compliance or estimate thoroughness and accuracy at the point of entry. This saves time and removes steps from the process.
You can also expect insurtech solutions to start to bleed to the contractor side of the industry. HOMEE is integrating cutting edge loss data, service providers, professionals, and insurance companies to property damage. This technology reduces steps and substantially reduces cycle time. On the insurance claim fulfillment process, this technology is reducing some processes from days to minutes. This will facilitate providers to the damage site much quicker in many cases. Keep an eye on this company as well as other cutting edge technology providers.
You can also expect virtual reality and artificial intelligence to make dramatic changes to the education and training process. This will be a longer evolution as the technology is relatively expensive and the restoration market is relatively small. Expect enhancements in training in the next few years.
Recommendations for technology:
- Many of the solutions will not work out as planned and we may experience a period of creative destruction as some fail while the process and systems become better. Study the solutions to find companies that bring executed solutions to your business. Utilize solutions that you understand and can implement in your business rather than continuing to add additional programs to your company.
- Have routine reviews to learn where you can consolidate or eliminate programs that become inefficient or redundant.
- Locate software solutions that verify compliance. This is the future trend and will remove time and steps from your process.
- Study technology, insurtech, and future trends. Look for technology that removes steps from process and reduces cycle time.
- Learn to harness data to objectively review your company across the board.
- 3D imaging will continue to enhance estimating, production management, billing, marketing, and site verification. If you are not using resources such as DocuSketch or Matterport, you will be left behind as this will become necessary in many areas for restoration contractors.
While not a trend, you can also expect continuation of mergers and acquisitions in restoration and in our lead sources, such as property management insurance companies and brokers. This will slow due to interest rate increases and economic changes.
The restoration industry has moved from the growth phase to a mature industry. Change is constant and accelerating. If you want to survive and thrive in this environment, take a serious business approach to your business. Focus on efficiency, leadership, strategy, and competence. Embrace technology but not the expense of efficiency and profits.
Your success will come through your people and relationships. Spend time on the resources that reward exceptional performance and have high standards. As your costs escalate, focus on cash and profits. Difficult times require strong leadership; create a company of exceptional leaders.